FINANCIAL MARKET EXCERSISES

Help me on task 2 pls!

1. Given the information above, use the expectations hypothesis to calculate and predict interest rates as follows:

a. If the one-year interest rate is expected to be as in the yield curve over the next three years, what interest rate is expected on a two-year bond one year from now?

b. What interest rate is expected on a three-year bond one year from now?

c. If investors attach term premiums of 0.0075, and 0.0085 to the two- and three-year bonds:

i. What would be the interest rate on two-year bonds?

ii. What would be the interest rate on three-year bonds?

iii. What is the forward rate for two-year bonds one year from now?

2. After describing the current yield curve and forecasting interest rates using both the expectations and preferred habitat and liquidity premium methods above

a. What is your recommended minimum interest rate for the five-year fixed-rate loans?

b. How would this rate be adjusted for customers that have some credit risk?

Interest rate (%) \begin{tabular}{|c|c|} \hline Maturity & Yield (\%/year) \\ \hline 1 year & 3,9 \\ \hline 2 year & 4,1 \\ \hline 3 year & 4,6 \\ \hline 4 year & 4,75 \\ \hline 5 year & 5,1 \\ \hline \end{tabular} Interest rate (%) \begin{tabular}{|c|c|} \hline Maturity & Yield (\%/year) \\ \hline 1 year & 3,9 \\ \hline 2 year & 4,1 \\ \hline 3 year & 4,6 \\ \hline 4 year & 4,75 \\ \hline 5 year & 5,1 \\ \hline \end{tabular}